Date: 03/8/2021
Author: Mr. X
As this is written, Bitcoin is over $51,000. At the beginning of this year, it was under $30,000. In late February it was nearing $60,000. By the time you read this, it may be below $50,000 again, or have topped $52,000.
Bitcoin has been extremely profitable for most investors over the past few months. It is accepted by people all around the world. It has major financial players behind it. It is beyond the power of any one firm or government to destroy.
However, it’s still not a fundamentally stable asset. Some say Bitcoin is “digital gold,” but gold has a certain inherent value and doesn’t dramatically fluctuate in price week by week. If you have physical gold in your safe, you can be reasonably confident it will still be valuable a year from now, five years from now, or even a decade from now. Can we say the same about Bitcoin?
I’m bullish on Bitcoin for the long term but even I have to admit some predictions about Bitcoin are ludicrous. Jack Dorsey famously declared three years ago that the Internet and the world would ultimately have only one currency, implying that it would be Bitcoin. JP Morgan said in January that Bitcoin could hit $100,000, though it warned such a surge would be unsustainable. Investor Michael Terpin said two months ago that Bitcoin would hit $100,000 by the end of the year. If that happens, it means there will be far more chaos in the larger economy. Bitcoin is not going to be the sole asset in history that will simply increase in value forever.
There are signs that Bitcoin is receiving mainstream acceptance. MicroStrategy, Square, and of course Tesla have all announced major Bitcoin purchases. In what is arguably more important, Tesla also said it would accept Bitcoin as payment. PayPal is also moving into cryptocurrency. It announced on Monday that it will be buying Curl, which makes cloud infrastructure for digital-asset security. All this normalizes Bitcoin.
Yet we still aren’t seeing most companies move into Bitcoin. There are three major reasons why.
The first is simple volatility. In theory, there is only a set amount of Bitcoin. Like they used to joke about land, God isn’t making any more of it. This should mean there won’t be any artificial inflation. However, this presupposes that there will always be a demand for Bitcoin. Will Bitcoin always be valuable and useful as a means of exchange? That’s probable, but by no means certain.
The Financial Accounting Standards Board does not have set guidelines for handling cryptocurrency. Based on the current guidelines for “intangible assets,” which generally apply to cryptocurrency now, a company can’t declare unrealized gains in Bitcoin prices but must declare losses in Bitcoin. Thus, from the perspective of investor confidence, there’s little to gain and everything to lose from buying. Bitcoin is still a speculative asset – and companies have more reliable ways to invest for growth than via cryptocurrency.
Second, and more importantly, the new Treasury Secretary Janet Yellen has made several comments critical of cryptocurrency. (See “Will The Feds Crack Down On Crypto?”) Specifically she’s said it’s not a stable store of value, doesn’t constitute legal tender, and is a highly speculative asset. In uncertain times, this isn’t what companies want to hear.
There’s also tangible action underway by the IRS to crack down on cryptocurrency gains. “Operation Hidden Treasure” will train agents to look at blockchains and expose tax evasion or hidden gains. It’s important to remember that what makes blockchain “secure” is what also makes it vulnerable. The whole point of blockchain is that transactions are overt and can be verified. With skill, you can conceal precisely who is making the trade, although even that is difficult to hide. However, you can’t conceal the fact of a transaction itself. If the IRS or anyone else can figure out who owns a Bitcoin wallet, it can see precisely how much money is moving in and out of it.
This might not be a problem if Bitcoin was simply just another asset. Everyone grumbles about taxes, but we still pay them. It’s simply part of doing business. However, if Bitcoin isn’t generally used to make ordinary transactions and the government can claim a large part of any speculative gains, what’s the point of it? If you are determined to speculate with high-risk trades, why not just stick to stocks? After all, the stock market can’t be easily manipulated by just a few “whales” or big-time investors the same way cryptocurrency can be.
The drive towards digital currency also raises questions about Bitcoin’s eventual role. Secretary Yellen has said a digital dollar is a priority. However, it’s virtually certain that China will defeat the United States in the competition for a state-backed digital currency. The United States government should use Bitcoin to help secure the dollar’s status as the world’s reserve currency. That doesn’t mean it will. We could see the federal government try to crack down on Bitcoin instead – taxing transactions and holdings instated of just gains. It wouldn’t destroy Bitcoin, but it would make it much less valuable.
This leads to the final reason Bitcoin may be in trouble – public relations. Bitcoin was once seen as something fashionable and vaguely progressive, a way to confront “big banks,” or “Wall Street,” or some other cartoon villain. However, banks are now increasingly championing their political contributions. They’ve gone “woke” and they are not suffering for it. The biggest financial players are rallying behind the biggest trend of the next decade, ESG (environmental, social, governance).
Bitcoin arguably fails all three of these categories. Bitcoin requires a tremendous amount of computing power to “mine,” and thus increases energy demands, including from sources like coal. A great deal of China’s Bitcoin production comes from the Xinjiang region, where the CCP is accused of human rights violations against the Uyghurs. Finally, who uses Bitcoin may become as important as who mines it. Stories about criminals or political extremists using Bitcoin could make the currency unpopular.
Of course, as explained above, Bitcoin is not very effective for secretive transactions. Only a fool would use Bitcoin to try to make an illegal trade. I doubt the true bad actors are using it on a mass scale. Yet the media has never retrained itself from running with a simplistic or misleading narrative.
Does this mean Bitcoin is doomed? Not necessarily. Investing in cryptocurrency as a hedge is a good strategy given worries about inflation, oil prices, and the general geopolitical situation. However, don’t limit your “hedge” just to Bitcoin. Most importantly, stay plugged in to the media narratives surrounding Bitcoin. Every currency is fundamentally about faith and confidence. Media is the most powerful tool when it comes to creating or undermining trust in a currency. For the foreseeable future, Bitcoin will suffer from at least some volatility.
However, if there is a full-scale “collapse,” it won’t emerge out of nowhere. Bitcoin has grown large enough that it will take more than one regulation or one politician’s condemnation to stop it. If they come for Bitcoin, we will be able to see it coming. Until then, trust but verify when it comes to the world’s largest cryptocurrency.
